Posts Tagged ‘TOD’

Avoiding Probate — A Good Idea, But Not Always Effective

AUGUST 25, 2014 VOLUME 21 NUMBER 30

Some people really don’t like city traffic, and will go out of their way to get on the freeway whenever possible. Of course, that approach can backfire — freeway traffic is sometimes snarled, and sometimes in unpredictable ways (and at unpredictable times). Avoidance of surface traffic can be a good practice, but of course isn’t itself the end goal; the real point is to get where you’re going quickly and efficiently, with a minimum of frustration along the way.

We’ve been looking for a good metaphor to explain our view of “probate”, that vilified court process that often (though much less often than you probably think) has to be undertaken upon a family member’s death. Maybe the freeway/city street metaphor isn’t perfect, but we think it might be suggestive of the real goal. You probably want to make administration of your estate as simple as possible, while minimizing cost and aggravation for your family. You also want your wishes carried out, and you might add “no squabbling” to your list of goals. Those are your goals; “avoid probate” is no more the goal than “get on the freeway” is a goal in driving.

Why the extended traffic metaphor? Because of a case we read this month from the Missouri Court of Appeals. We thought it was a good case study in how probate avoidance sometimes is ineffective (and, in the reported case, probably even drove up the cost and complication).

Susan McCauley (not her real name) had a modest estate. In fact, her debts apparently exceeded the value of her assets. She had three children, a home, a commercial rental property, a brokerage account and three bank accounts. She and her late husband had borrowed money against the commercial property and also had a signature loan with the bank; the amount of those two loans exceeded the value of the property itself.

Whether avoidance of probate was Susan’s primary goal or not, she took several steps to accomplish that result. She made her bank accounts “payable on death” to her three children. She put a “transfer on death” titling on her brokerage account, again naming her three children. She executed beneficiary deeds naming the children as beneficiaries for all of her real estate (Missouri, like Arizona, is one of the minority of states that recognize a “beneficiary deed” or “revocable transfer on death deed” on real estate).

When Susan died in 2008, her son filed a simplified probate proceeding allowed under Missouri law, in which he recited that her probate assets consisted only of her personal property with a value of about $16,000. Since that amount was well under the Missouri limit of $40,000, he sought an order allowing transfer of all of her remaining personal property to the three children.

Not so fast, argued the bank which held Susan’s two notes. The bank claimed that Susan owed over $370,000, and asked the probate court to order her son to bring all of those non-probate transfers (the beneficiary deeds, the POD and TOD accounts) back into the probate proceeding to satisfy their claim. Meanwhile, the bank went ahead and foreclosed on the one property it had most direct control over — the commercial real estate, which secured one of its loans.

After sale of the rental building, the bank’s remaining claim was a little over $164,000. It continued to insist that it should be able to get her house, bank and brokerage accounts to defray the remaining debt.

Susan’s son explained to the probate court that there really hadn’t been all that much left in her estate. After payment of about $22,000 in other debts (presumably, but not clearly, including her final medical and funeral/burial expenses), the three children had split the house and about $60,000 — including about $30,000 in equity in Susan’s house. The bank asked for judgment against the three children for the $60,000.

The probate court disagreed about the equity in the house, noting that the children had borrowed $50,000 against the house in order to pay those last expenses and that values were lower than the bank thought (remember that all this was taking place in 2008/2009). It ordered that the house be listed and sold, and that any net proceeds after repayment of the loan taken out after Susan’s death should be given to the bank. The probate court also removed Susan’s son as personal representative and appointed a new, neutral personal representative.

The bank appealed, arguing that (a) the probate court should have entered a judgment against Susan’s children and ordered them to repay the estate, rather than ordering sale of the house for whatever it might raise, and (b) the proper valuation of damages should be based on the value of the house on the date it was transferred (that is, on the date of Susan’s death), not months later as property values slid. The Missouri Court of Appeals agreed on both points.

The result: the probate court was directed to calculate and enter a judgment against Susan’s three children for the amount they received (up to the bank’s debt, which clearly exceeded any valuation of the amount they received). Rather than ordering sale of the house and distribution of any net proceeds, the children would be liable for the value of everything they got — and that valuation would be as of the date of their mother’s death, not based on what they held at the time of resolution. Merriott v. Merriott, August 19, 2014.

Would the same result have occurred if Susan had lived and died in Arizona? Probably. Missouri’s statutes on bringing assets back into an estate to satisfy creditors are very similar.

In hindsight, Susan would have made a better plan by simply writing a will leaving her estate to her three children and keeping all of her assets in her name alone. Her son could have been appointed personal representative, listed her home and sold it for what it would have actually fetched on the market, identified the priority of claims against her estate (paying funeral and last-illness expenses first, plus his own — and his lawyer’s — fees for administration) and simply paid any remaining balance to the bank (and other creditors, if there were any). He (and his siblings) would not have borne the risk of a falling real estate market, would not have incurred additional administrative expenses, would not have suffered the indignity of being removed as personal representative of his mother’s estate, and would not have had a money judgment leveled against him (and his siblings). But sometimes you don’t know what traffic is going to look like until you’re already on the on-ramp.

How To Avoid Probate — And What Doesn’t

APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.

Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.

Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:

Die poor. In Arizona, an estate consisting of up to $75,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $100,000 in value. Most other states have a similar law, but with dollar limits that vary widely. [Note: the small estates numbers were updated to the figures listed here by the Arizona legislature in 2013.]

Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.

As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.

Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.

Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.

Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.

Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.

Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?

  • POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
  • TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
  • Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).

What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.

Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.

So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:

Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.

Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.

We have more information in our YouTube channel on this subject: .

Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.

“Vest Pocket” Deed Is Valid to Transfer Family Farmland

OCTOBER 25, 2010 VOLUME 17 NUMBER 33
It has been a while since we wrote about “vest pocket” deeds. That reflects the reality that they are more common in fiction and mythology than in the real world of legal proceedings, but they occasionally do crop up. The problems of validity and effect can involve lawyers after the signer’s death, even in cases where avoiding legal complications was the signer’s primary goal.

Cecil Stockwell lived all of his 91 years in rural South Dakota. He acquired and farmed land totaling over 1,000 acres in 14 parcels. He had five children; for the last twenty years of his life he lived (and was farming partners) with his son Lloyd Stockwell.

In 1992 Cecil Stockwell visited a local lawyer in Freeman, SD, about estate planning. He had the attorney prepare a power of attorney naming Lloyd as his agent, plus four separate deeds to his properties. Each deed conveyed a different number of acres of land to one of his four sons — Lloyd, for instance, would receive 594 acres, and his oldest son Cecil, Jr., would receive 80 acres. Each of the four deeds retained for Cecil the right to farm, rent or use the land; on his death the four deeds would have conveyed their respective properties to his sons.

“Would have” is the operative phrase here. Cecil never recorded the deeds, and he never gave any of them to his sons. He took them home and filed them away. They became what are sometimes called “vest pocket” or, more simply, “pocket” deeds. They would not be effective until actually delivered to the recipients or recorded; their effect if discovered after Cecil’s death would be uncertain.

Cecil did not let the deeds create that confusion, however. In 2001, after he became unhappy with one of his sons, Cecil Stockwell asked his daughter-in-law to help him redraft the old, undelivered deeds. With her help he modified the properties that would be transferred to each of his sons, with the result that Lloyd’s inheritance would be significantly larger. One son (the one he had become unhappy with) was left out entirely, one’s share stayed the same, and the fourth son’s share was reduced somewhat.

After he signed all three of the new deeds and had them notarized, Cecil returned home and handed them to Lloyd, saying “Here you go” or words to that effect. Lloyd took the deeds into his father’s bedroom (remember that he lived with Lloyd) and put them in the dresser that Cecil used.

Two years later there was more family disharmony when three of Cecil’s sons initiated a guardianship and conservatorship action, seeking to have him put in a nursing home. Lloyd helped him get a lawyer to fight the petition; in the course of that proceeding his lawyer had a videotape prepared showing Cecil’s ability to identify all of his children and describe where they lived and what they did for a living. He did get the size of his farm wrong (he said 300 acres, when it was really more than 1,000 acres), and he had trouble naming one of his grandchildren or remembering that his ex-wife had remarried.

Six months after the guardianship petition was initiated Lloyd told Cecil that it was time for him to move into a nursing home. Cecil reminded Lloyd that the deeds were still in the dresser drawer, told him to get them out and have them recorded. Then he asked to be taken on a last tour of his farmland and moved into the nursing home. Lloyd had the deeds recorded a few days later. Four months after that Cecil died.

Lloyd then filed a lawsuit — a “quiet title” action — to have the deeds validated and his inheritance confirmed. His brothers objected, saying that their father was incompetent at the time of signing and/or at the time the deed was delivered. The trial judge found that the three deeds signed in 2001 were effective, and confirmed the transfer of the farmland to three sons.

The south Dakota Supreme Court agreed with the trial judge and affirmed the verdict. One key element of that ruling: the appellate judges agreed that the deeds were delivered when Cecil Stockwell handed them to his son Lloyd — or at least that Lloyd’s deed was. That meant that the question of Cecil’s capacity had to be tested as of 2001, when the deeds were signed and handed to Lloyd, rather than 2004, when they were recorded. Interestingly, an argument could be made that the deeds to the other two sons had to be tested against Cecil’s capacity in 2004, even though Lloyd’s deed only raised questions about Cecil’s capacity in 2001. Stockwell v. Stockwell, October 13, 2010.

Could a lawyer have helped Cecil Stockwell accomplish what he wanted? Absolutely, and at a much smaller cost than his sons ended up paying to their lawyers to sort out the meaning and effect of the vest pocket deeds. With good legal advice, Cecil might have gone ahead and recorded the “life estate” deeds he signed in 2001 — though he would then have given up the ability to make further changes. A lawyer might have recommended that he transfer all of his property into a revocable living trust, which would have allowed him to retain the ability to change who would receive which parcel at his death, and even to make clear who would farm each parcel until that time. Even a will naming beneficiaries would have been less expensive than the vest pocket deeds — as it turned out, his sons filed a probate proceeding anyway, and avoidance of probate might well have been Cecil’s primary motivation.

Because Cecil Stockwell did not live in Arizona (or Arkansas, Colorado, Indiana, Kansas, Missouri, Montana, Michigan, Nevada, New Mexico, Ohio, Oklahoma or Wisconsin) he did not have one useful option available to him. An attorney in those states could have told him about the concept of a “beneficiary” deed — sometimes called a “transfer on death” or “TOD” deed — which might have been exactly what he needed. Such a deed is revocable, but makes the transfer automatic upon the owner’s death. If that had been available to him, it might have let him record his deeds back in 1992 and again in 2001 without blocking him from making later changes as his feelings toward his sons changed.

Two Life Insurance Beneficiary Designations Require Litigation

APRIL 28, 2003 VOLUME 10, NUMBER 43

When people consider “estate planning” they usually are thinking about preparing a will. Sometimes the common conception of estate planning includes preparing a trust as well, and often durable powers of attorney are also part of the plan. But two recent cases demonstrate that “estate planning” is really much more—it includes the titling of assets and beneficiary designations as well. The most carefully-considered estate plan may fail if those other issues are not also dealt with at the same time.

Lori Flanigan was divorced and had two children when she married her second husband, Craig Munson. Ms. Flanigan had two life insurance policies through her work totaling $217,600. Her divorce agreement required her to name the children as beneficiaries on her life insurance, but she had not gotten around to completing a beneficiary designation form when she died in 1995.

Her insurance policies provided that they would be paid to a surviving spouse if she had not designated a beneficiary, and so the proceeds were distributed to Mr. Munson. The children’s grandparents (who took custody after Ms. Flanigan died) then filed a lawsuit to impose a constructive trust on the remaining insurance proceeds and Mr. Munson’s home, since he had used some of the proceeds to pay off his mortgage and other debts.

The trial judge denied the grandparents their requested relief, but the New Jersey Supreme Court agreed that the insurance proceeds should go to the children. It ordered the money transferred to the children’s benefit—eight years and thousands of dollars in legal fees after her death. Flanigan v. Munson, April 3, 2003.

Daniel Lambert was not so lucky. He argued that his mother’s life insurance policy should be part of her estate, and that her will specified that he was to receive a portion of that estate. Unfortunately for him, whatever his mother’s intentions might have been she had named her daughter Suella Southard as beneficiary.

Another sibling, brother Steven Powell, was prepared to testify that their mother had always intended that the life insurance policy should be used to pay the costs of handling her estate and then distributed to the children according to her will. He was not allowed to testify, however, because of a long-standing court rule prohibiting testimony about conversations with deceased persons, the so-called “Dead Man’s Statute.” The Indiana Court of Appeals refused to permit imposition of a constructive trust on the life insurance proceeds. Lambert v. Southard, April 1, 2003.

The moral: “estate planning” requires consideration of beneficiary designations and account titles as well as signing of a will, trust and powers of attorney. Even a carefully-drafted estate plan, including a will, a living trust and both financial and health care powers of attorney, can be altered or frustrated by incorrect (or missing) beneficiary designations, joint tenancies, “payable on death,” “transfer on death” or “in trust for” account titles or other, similar arrangements.

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